Einhorn noted he likes debate and did it in high school, as you had to be able to argue both sides of the argument. That trait is useful in investing as you look at the contra viewpoint to your position.

"We're wrong all the time. I shouldn't say all the time. We're wrong often. We have to constantly question whether we're wrong."

On launching Greenlight: There's very low barriers to entry in the hedge fund industry and he thought if they could do a good job with a small amount of money they could live a good life. He never dreamed that it would grow as much as it did.

He attributes his success to critical thinking skill. If you can have a distinct viewpoint from everybody else and be right, you can be successful.

About Greenlight's culture: He thinks Greenlight has a lot of humility and respect with smart and nice people working together. They want to respect each other's time. Critical thinkers that reason and think before they speak and can adjust to new facts and feedback.

Einhorn is an avid poker player and he says it's a very similar skillset as you have certain facts you know (info about the company) and then things you can surmise (CEO's motivation, etc), and then unknown things that could come in the future. "So you combine what you know, with what you think you can surmise, combined with understanding the range of outcomes relating to the uncertain things and saying is this a good place to commit a fraction of my capital?"

In poker, you know how many chips everyone has, what your cards are, what the card on the table are. But you have to surmise what the other players might have or might do. And then the uncertainty is the range of future cards that aren't yet displayed.

In investing, Einhorn likes to focus locally or in developed markets. He says the further you get away (geographically or developmentally) there's a lot of local customs, local knowledge you have to acquire and it's hard to compete when you're sitting in New York, even if you go visit every once in a while.

Q&A Session:

On the environment for launching funds: If you're launching today, you're basically hiring 14-40 people from analysts to traders to CFO to backoffice, etc. So you basically need to have enough assets under management right out of the gate to justify all that hiring and to fund the business. His launch wasn't really like that: it was him and another guy in a tiny office doing all the various duties. With a small AUM, there wasn't a lot of expense so you could do that. He thinks you could still do that today if you had a differentiated strategy and articulated it well and had a client base. He relied on word of mouth once he had a good start performance-wise. He notes that the whole 'capital introduction' industry has spawned since then and so that's been a big difference.

On shorting companies/bubble basket: He doesn't short companies on overvaluation. He always looks for some sort of deterioration. There's been a lot of companies that aren't really profitable (his bubble basket of 40-50 companies) and while 4 or 5 really worked against him, the vast majority of the basket worked in their favor. That is, until this year. They've all gone up and rallied against him but until they start showing profit, he won't take a different view.

On being contrarian: He has to re-assess constantly, especially if the position moves against him. So you have to constantly evaluate and understand the other side. If something's changed, you've got to reduce/increase/exit based on that information. Generally his choice is to reduce or eliminate a position. But if he thinks he's right, patience is the way to go.

On if he'll change his strategy as value hasn't worked as well recently: "Our goal is to achieve attractive risk-adjusted returns over time while taking demonstrably less risk than the market as a whole. Which means fundamentally we're not comparing ourselves to the S&P 500 or an index, so we don't evaluate ourselves that way."

"The way you deal with unknown unknowns is through portfolio construction. We like to run a concentrated portfolio, but even our best idea we're not going to put all our money in. You have to have some level of diversification ... a certain amount of market risk."

"We tend to think of risk as how much can we lose in the worst case?"

On machine learning/competing with robots: "We view these investments as puzzles. There are the few things you know, but they're not the most important things because everybody knows them. The most important things are what is that you can infer and how good are you assessing the possible range of outcomes, either the known unknowns or unknown unknowns and how do you construct that into a portfolio. I'm sure the machines have views on these and the shorter-term the decision, the more likely the machine is going to figure it out better and faster than the human. But our goal here is just to find things that are widely misunderstood by a large margin such that we're not competing with that kind of technology, because I don't think we would beat them."

On short-termism vs long-term focus: "I think that one of the inefficiencies in the market is investors are generically too short-term oriented and time arbitrage is one of the best inefficiencies in the market."

Bill Miller of Miller Value Partners recently appeared on Consuelo Mack's Wealthtrack. His hedge fund, MVP1, invested in bitcoin in 2014 and 2015 and he said it now comprises 50% of his fund. Here's a summary of the conversation:

His average cost is around $350 and he was buying between $200 and $500. Bitcoin recently traded around $20,000. He likened his purchase of bitcoin early to his purchase of Amazon (AMZN) way back in the day.

"One of the things we try to do is to have an open mind, especially about new technologies. Most of them don't work, so you have to believe you have a high probability of being wrong, and if you have confidence in it, it's likely not going to work. So it's really a question of assessing risk and reward on a case by case basis."

He says he was aware of it before he bought it but didn't take it too seriously... likened it to an experiment. He read a book called Digital Gold and he also found it interesting that people he had a high regard for in the venture capital world took an extreme interest in it (Marc Andreessen, etc).

He was convinced bitcoin had a future because it had already passed its biggest stage of risk in the early days. "There really hasn't been any technological innovation in money... ever. There's been stages... rocks, to jewels, to gold and silver ... by and large money was a tangible thing. Governments began issuing fiat currency that was also backed by something tangible."

Miller says bitcoin is uncorrelated as a potential asset to anything else. It doesn't matter what's going on in central banks or geopolitics. Another book Miller mentioned was The Construction of Social Reality. Miller said that the founder of Bitcoin likened the cryptocurrency to 'digital gold.'

Given the risk/reward, he mentioned advice he heard that you could put 1% of your net worth in it and that way if it goes to zero, your downside is limited but if it skyrockets, you've got exposure.

Miller says the problem with bitcoin is you have to store it, and if you store it on an exchange and that exchange gets hacked, then you lose it forever (there was a hack of a major exchange a few years ago). He says the emergence of futures contracts for bitcoin is a big move and the next step will be exchange traded funds (ETFs).

He pointed out that right now there's about $7.5 trillion worth of gold while bitcoin's market cap is around $290 billion dollars.

If you consider it a currency, he says bitcoin would be the 17th largest in the world right now. While it won't supplant the major currencies, there's a chance other volatile currencies could see people seek a store of value elsewhere. The problem, however, is of course bitcoin itself has had wild fluctuations in value. So it can't really be viewed as a major currency replacement at the moment.

While he has 50% of his hedge fund in bitcoin, he's never run that concentrated before... citing previous top holdings at around 20%. That said, he's looking at hedging the exposure but isn't ready to disclose how he's going to do that, but he's not selling the long. He started it as a 5% position and it's grown so much.

He also has some bitcoin cash, which is an offshoot, but he doesn't own any other crypto currencies. He likened bitcoin to VHS tapes or Bluray, etc were one format became the defacto choice, so the others won't be as relevant.

When asked about risk, Miller quoted someone saying "I wouldn't have anymore money in bitcoin than I was willing to lose 100% of." He thinks the chance of it becoming worthless are far, far less than they were in the early days though.

Embedded below is the video of Bill Miller's appearance on Wealthtrack talking bitcoin:

Jeff Smith's activist firm Starboard Value has filed a 13D with the SEC regarding shares of Cars.com (CARS). Per the filing, Starboard now owns 9.9% of the company with 7.1 million shares.

This is a new position for the firm and the filing was made due to activity in late November and early December. They acquired shares primarily between $24 and $27 from November 22nd through December 18th.

The filing notes that Starboard feels that shares are undervalued and represent an attractive investment.

Per Yahoo Finance, Cars.com "operates as an online research destination for car shoppers. It sells online subscription advertising products to car dealerships by its own direct sales force, as well as through its affiliate sales channel. The company also sells display advertising to national advertisers. In addition, it offers online automotive marketplace service that connects buyers and sellers in Cars.com, Auto.com, DealerRater.com, NewCars.com, and PickupTrucks.com Websites. The companys Website hosts approximately 4.7 million vehicle listings at any given time and serves approximately 20,000 franchise and independent car dealers in 50 states. The company was founded in 1998 and is headquartered in Chicago, Illinois. Cars.com Inc. is a subsidiary of TEGNA Inc."

Short seller Jim Chanos of Kynikos Associates recently sat down with CNBC for an interview. Here's a summary along with video and the transcript.

On healthcare: He thinks the new tax bill will cause the healthcare industry to see deflation. "We've been looking at the rent-seeking companies, companies that we think have existed on the periphery of the healthcare economy that basically have went after these pricing sort of gamesmanship models. And we think that's over. We think as the pie shrinks, it's going to be tougher and tougher to justify the ability of companies to hike drug prices 1,000% or charge commercial insurers five times what you charge medicare and medicaid in the case of dialysis ... We're still very negative on the PBM (pharmacy benefit management) space, Express Scripts (ESRX) came out and reaffirmed guidance, raise it this morning. There's not reason for independent PBMs to exist, for example."

On Tesla (TSLA): He's still short. He thinks the company's equity is worth zero and other competitors are ahead of them in terms of autonomy for self-driving cars (citing Waymo, Audi, and others). Says the problem is that the company can just keep raising capital and if that train keeps going then it's an issue. But he's still very bearish on the company and sees the CEO Elon Musk as a bit of a showman constantly using hype, press releases and product launches.

On fast food: "I'd be short pretty much anybody in the quick service industry besides McDonalds. MCD still calls the tune. They're the 6 billion pound gorilla, so to speak. They just went to a new value menu a few weeks ago, which always impacts the industry. It's a dog fight."

He points to the companies' transition to the asset light model in the space. He singled out Restaurant Brands (QSR), the owner of Burger King and Tim Hortons, which has been a hedge fund favorite. He says while these companies are getting higher multiples for running an asset light model, look at how the franchisee is doing because the restaurants themselves still have to perform. These restaurants are being hit with higher royalty rates and rising costs, so they're starting to struggle.

On retail: Chanos said they had a lot of exposure to the "well known shorts" in the retail industry but has covered them so they only have small exposure in that sector right now. They think it will be a decent Christmas holiday shopping season so he'll probably re-examine them as they bounce into 2018.

CNBC's Kelly Evans recently interviewed legendary investor Stan Druckenmiller, who previously worked with George Soros and then started his own firm Duquesne (which he now runs as a family office).

Regarding interest rates, he says he wants to see normalization, not so much just rates rising, as he noted there's a difference between the two. The former, he says, is about re-establishing a hurdle rate for investment.

"Bitcoin, art, wine, equities, credit... you name it. Everything is one way up. And there's huge distortions taking place and it's all in the name of this 2% inflation target. And when you get a misallocation of resources, it really hinders growth over the longer term."

He notes there's companies out there borrowing tons of money that shouldn't be and gave Steinhoff as an example (which he mentioned he had been short).

He doesn't own any bitcoin as he says he trades only what he knows. "It's worth what people are willing to pay for it."

This year, Druckenmiller says he's done well in stocks but he's really mistraded macro. "I'm not up double digits. I'm having, relative to the opportunity set, a terrible year." He's had a bad time in currency trading apparently but his excellent equities returns have bailed him out, so to speak.

Turning to equities for 2018, he doesn't buy the narrative that this is all about earnings. He says it's all about central bank radicalism.

But for specific stocks, he really likes the stocks he owns long-term. There's a lot of disruption going on in tech. He's also been short retail throughout the year and he expects that theme to continue.

On the long side: "I love Amazon (AMZN). This company, which everyone keeps quoting the multiple... is selling for less than 3x sales. They're dramatically underearning. You have to look at the long-term earnings power of the company. I think (CEO Jeff) Bezos is incredible."

In China, Druckenmiller really likes Tencent (700.HK) as they're in payments, videos, cloud, gaming, and a huge platform (WeChat). Like AMZN, they're also underearning and trading at 40x with a 40% growth rate, he says you're getting it at 1x growth rate.

Regarding Tesla (TSLA), he said he doesn't like to short great products (he gave himself one for his birthday a while back). He questions the long-term financial model of the company, though.

On Apple (AAPL), he doesn't find it as exciting as AMZN, Facebook (FB), or Alphabet (GOOG). He thinks AAPL might be overearning and doesn't own it but isn't short either. He likes Workday (WDAY) as it fits into the new economy.

He doesn't think tax reform will impact the stock market as it's already priced in and anyways he feels the market is driven by central bank policy anyways.

Embedded below is the video of CNBC's full interview with Stan Druckenmiller:

Monday, December 4, 2017

The Sohn London investment conference recently concluded and featured investment managers sharing their latest ideas in order to benefit the Sohn Foundation for pediatric cancer treatment and research. Click the links below to go to each speaker's presentation:

SMC is a $30bn market cap Japanese company with $5bn of sales. It is the world’s largest pneumatic components supplier with a wide global coverage (72 subsidiaries). Craigen first looked at SMC after the Olympus accounting fraud which broke in 2011. The key takeaway from Olympus was that the fraud had been going on for 20 years before it was discovered.

There are several accounting issues at SMC:

- Large companies around the world are usually audited by one of the big four accountancy firms. SMC has had the same auditor since the late 1980s. The auditor is small with only 16 qualified accounting staff. It does not audit any other mega-cap companies. Clients of this company have subsequently been proven to be frauds.

- There is no global unified audit. There are 36 unconsolidated subsidiaries – far too high and unusual.

This year there have been three allegations about SMC made by FACTA online, the Japanese publication that first broke the Olympus fraud. They have highlighted related party transactions that have been made through a US subsidiary; opaque tax reporting in SMC’s Mexican operations where a private residence was used as the tax address and the late delivery of orders in the US.

Despite this negative news flow, the sell-side and buy-side maintain a bullish stance. Seventy five percent of analysts’ rate SMC a buy whilst the top five holders’ shareholdings remain unchanged this year.

Since FACTA published its findings SMC’s share price is up 80%.

Lansdowne’s short in SMC is hedged out by 3 long positions in VAT 33%, a Swiss company specialising in semiconductors; Airtac, a Taiwan company which is a pneumatic components pure play; CKD 33%, a Japanese competitor, No.2 to SMC.

Revenue growth for the long basket is much higher (x3) than SMC’s. The long basket is also trading at a substantially lower valuation.

Something is not right with SMC’s margins. SMC does not sell the highest value-added products in the industry yet it’s margins are among the highest. This calls into doubt its reported earnings.

-BREXIT will do nothing to address the social imbalances in the UK. It will actually make them worse. Inequality in the UK is as high as in the US.

- Productivity in the UK is extremely low and imports are high.

- Sterling’s devaluation has generated inflation. The inflation suffered by the lower classes is much higher. Jeremy Corbyn, The Labour Party leader is likely to become the next Prime Minister. Looking at Corbyn’s policies and the likely high level of public spending you want to short 10-Year and 20-Year Gilts.

Long Santander Mezzanine Debt

Santander has not lost money in 200 years of banking. They only had 40 branches 50 years ago now they are running 12000 with 120m clients. Santander were given the Spanish Bank Populaire almost for free by the regulator. As a result, they will be able to achieve higher synergies and more profits.

Algebris are positive on areas of the market where central banks are not buying. Invest where the central banks cannot so that you buy assets that are not being manipulated. Avoid corporate bonds that the ECB has been buying. If you buy European higher yield you get 2%. If you invest in an index of hybrid European financials you get paid 6%. Santander cannot lend to European high yield companies because it is considered too risky and there are regulations preventing it. How can something so risky yield 2% and the bank that is not allowed to lend to it yield 6%? The answer is that the ECB can buy high-yield bonds but not the credit of banks because of possible conflicts of interest with its regulatory role.

Santander is a strong bank. It would have to lose 21bn euro to be unable to pay a coupon. They have never posted a loss.

Remain long the hybrid capital of banks – you want to own the mezzanine debt not the equity.

Infineon is a global market leader in power semiconductors, it is listed in Germany with a market cap of 25bn euros. It’s main end markets are the 1. automotive sector 2. industrial sector 3. security sector.

Over the last 20 years the company has grown organically on average 9% per year which compares to the overall semi market which has grown at 6% Its main end markets are fast growing. Automotive and industrial are growing at 7% to 8% per year. Two-thirds of Infineon’s business is in the power segment where it has twice the market share of its next competitor. It also has an interesting business in sensors where it is a strong No.2.

One of the exciting things about the company is that its exposed to the electrification of the power train. There are two reasons why we are going to see more electric vehicles. Firstly, the OEMs are having to meet stricter targets. Secondly, the manufacturing cost of EVs is coming down dramatically. By 2020 or 2021 electric vehicles will become a serious consumer proposition in terms of total cost.

By 2020/21 expect EV’s to have more than 500KM of range and to have a rapid charge facility that could be as low as 10 mins. At that point everyone is going to want an electric car. There are supply concerns and materials concerns but nothing that can’t be overcome with a bit of time and investment.

As the power train is electrified more power semiconductors will be needed. EVs need four to five times more power semiconductors than cars with internal combustion engines. Fully autonomous cars and the stages toward them will require even more semiconductors.

Infineon can achieve more than double digit organic revenue growth for the next decade. It trades on 22x forward earnings. It has net cash on its balance sheet.

Pirelli was IPOed two months ago. It used to be a sprawling conglomerate involved in real estate, cable and football clubs but today it’s a pure play premium tire company. Croxson particularly likes Pirelli because the end demand is predictable. Why is the tire market predictable?

- There are 1.2bn cars in the world which need 1bn replacement tires every year. Car owners must buy new tyres or face a fine from the police or a potential accident.

- The total number of cars is growing with about 500m new tyre required each year.

- The global tyre market consistently grows at about 3% per year.

- If there is an acceleration of new car sales, there will be an acceleration of replacement tyre sales in 3 to 4 years.

- The tyre companies make most of their money from replacement tyres not from suppling tyres for new cars. They sell the original tyres at a reduced rate to car manufacturers in the hope of getting the replacement tyre sales later.

- Demand growth has been steady for the last 16 years with barely a drop in the credit crunch.

- EVs and autonomous cars will still require tires.

The premium tyre market is a small subsection of the tyre market. Premium is defined as high performance tyres of over 18 Inches. It’s a 200m unit market in a total tire market of 1.2bn a year, about 15% of the overall market.

There are only six scale players who compete in the premium market: Pirelli, Nokian, Michelin, Continental, Goodyear and Bridgestone. Their positions are protected by large R&D budgets which help them to stay ahead on grip, safety and efficiency.

The global premium market is growing at around 9% per annum. Customers want larger cars, particularly more luxurious SUVs. This trend will continue. VW is trying to go from 15% SUVs to 40% in the next 5 years. As the rich become richer they want more expensive vehicles. In China in 2006 50,000 luxury cars were sold and today that has reached 2.5m. The Chinese market is now the largest car market in the world. The penetration of luxury tyres is still only about half of what it is in the west.

Pirelli can grow their business at 13% per year. In addition, Pirelli has been able to hold prices above its peer group for the last 5 years.

Pirelli does have a leveraged balance sheet at around 3.5x net debt to EBITDA. The stability of the cash flows should see it de-lever to around 2x by 2020.

Benchmarked against the peer group, the stock could trade up by 60%. As the only pure play premium tyre manufacturer, Pirelli is a higher-quality asset and should command a higher multiple than the peer group.

Criteo is a French technology company with a market cap of $2.1bn that is listed on the Nasdaq.

What does Criteo do? It helps retailers to covert online shoppers using browsing behaviour to deliver targeted advertising. It does this by being directly integrated into the advertiser’s website. Criteo learns our preferences as we browse. More than two-thirds of its revenue is generated on mobile devices. It can link people’s identities across devices and it can send advertising to mobile, laptop, via Facebook as well as in-app.

What makes Criteo a good investment? It has a very strong position in a fast-growing market. Digital’s share of the advertising budget is projected to grow from 29% in 2015 to 43% in 2020. The fastest growing segment in digital advertising is programmatic. This segment, where Criteo operates, is growing at 25% CAGR 2015-2020.

It is the largest independent player in the programmatic space, third overall behind Facebook and Google. It’s 5x the size of the next independent competitor. Having an independent player is important for all sides. Many e-commerce retailers and web publishers don’t want to give Google and Facebook full access to their sensitive customer data. Facebook and Google value automated and scalable solutions and prefer to deal directly with advertisers.

Criteo has recently started integrating offline CRM data by using data from loyalty cards, credit cards and other unique indentifiers. That level of integration between off-line and on-line shopping is the holy grail for most retailers and will increase the value of Criteo’s database.

Every time internet users browse a website of one of its clients, Criteo tracks the entire purchasing and browsing activity regardless of how the user ended up on that website. Critieo sees more than twice the number of transactions than Amazon. In addition, it tracked users browsing and purchasing activity on 4bn products – more than each of Amazon, Alibaba and Ebay. This unparalleled scale should allow Criteo to send the right ads to the right person at the right time. It creates self-reinforcing network effects. The more clients you have the more data you collect. The more data you have the better the performance of your apps. That in turn helps you attract more clients and generate more data.

The value of the data can be seen in the click-through rates – the proportion of ads that generate a click - that are 4x higher than the industry average. They are second to Facebook on click-through and only just.

Criteo is virtually alone in the industry in charging advertisers based on post click sales. Most digital advertising companies still charge a fee every time the ad is displayed regardless of whether the consumer interreacts with it or not. As a result, many clients have given Criteo an unlimited budget as they only pay for advertising when they make a sale. More than 75% of Criteo’s revenues come from such clients. On average it generates 18x return on investment for clients.

Westray’s interviews with clients, competitors and publishers find that Criteo is consistently ranked best for performance, superior to even Google.

Criteo’s stock has de-rated recently on fears that a new version of Apple’s Safari browser will contain something called Intelligent Tracking Prevention that may disrupt digital advertising players. Masil believes that Criteo has the tech knowhow to be able to deal with this.

The company is undervalued on nearly all metrics. It will continue to grow revenue at a CAGR of 20% between 2016 and 2020 with even higher growth rates for EBITDA. Criteo is unusual among tech companies in that it is highly cash generative. At the end of 2017 the company will have 17-18% of its market cap in cash.

Short Cineworld (LON: CINE)

Cineworld is a cinema operator. Last week Cineworld announced its intentions to buy Regal, the second largest cinema operator in the US. The shares sold off 20%. Masil said that was not part of their original thesis but that the potential purchase of Regal reinforces their negative stance.

Cineworld is one of Europe’s largest operators with 226 cinemas and 2100 screens. It generates 55% of its EBITDA in the UK and Ireland. Most of the rest comes from eastern European countries. Two-thirds of revenue comes from ticket sales and one-third from selling food and drink.

- The UK cinema market is mature and ex-growth.

- The company has been expanding aggressively in the UK which is a flawed strategy.

- Younger people go to the cinema less and instead consume content online.

- It will be hard to put ticket prices up further. They have already been put up well ahead of inflation.

- Cineworld is suffering a downturn in admissions per screen. A 5% decline in admissions per screen leads to a 15% decline in EBITDA

- The structural pressure on the cinema industry is intensifying.

- The period in which cinemas can show new films exclusively without them being shown online is reducing.

- Amazon and Netflix are making their own content and growing their customer base rapidly

- The performance of Cineworld shares has outperformed the sector for no good reason.

- Cineworld trades at a forward P/E 18x 2018. Capex is high as the cinemas require constant refurbishing.

Oil prices will go much higher than consensus. In the last 18 months there has been a lot of negative hype about oil prices. The two most discussed factors have been US shale production and electric vehicles. US shale has been called the internet of oil.

Demand for oil has rarely been as strong as it is today. Demand is as high as it was 10 years ago when there was a lot of talk about the super cycle and demand growth. New oil discoveries are at all-time lows.

Supply will peak before demand at current oil prices. Oil demand will peak sometime between 2027 and 2035, much later than the consensus view. The supply of electric vehicles will be constrained by a shortage of batteries.

Supply will peak in 2020. Oil discoveries peaked in the 1960s. They stabilised in the 1990s making a lower peak with US shale discoveries in the early 2000s but they have been declining since then. We are finding 10x less oil than we were 20 years ago. Global reserves are going down fast. We have a 100bn barrels (or 10% less) of reserves than we had 10 years ago when everyone was worried about peak oil. The largest declines have been in ex-US small oil fields. The rate of decline will quicken and supply will be less than expected.

Nobody wants to invest in oil projects that take 6 years to come to market and 20 years to make a profit. Against expectations, US production is flat this year. Productivity per well will go down. We could need $100 a barrel oil to mitigate the fall in supply.

If OPEC goes back to full production, there would still be a deficit of half a million barrels per day. Inventories are low.

OPEC is unlikely to go back to full production leaving a deficit of 1m barrels per day. In this scenario oil could easily reach $80 per barrel.

If there is a geo-political event in the Middle East like a major war, we could see $150 per barrel. There are a lot of potential downside risks to supply. In-fighting in the Saudi Royal Family. An Iran-Saudi war. The US could impose sanctions on Iran which could push oil price oil prices up.

Fertilizer prices are at historic lows. OCI produces urea, ammonia and methanol. Urea is trading at a 30% discount to the mid-cycle average, ammonia at a 50% discount and methanol at a 6% discount. Prices are close to the bottom. There has been no capacity growth for the last 2 years. China has reduced production of urea exports. There has also been an anti-pollution drive in China that has led to coal prices going up. Coal prices have gone up which has had a knock-on effect on fertilizer production making the economics of fertilizer production less attractive.

OCI is one of the most efficient producers of fertilizer. Even at todays low prices they still produce satisfactory cashflow, unlike 40% of the industry which is producing at a loss. OCI’s geographical location is very good. They are based in northern Europe and Iowa, US. As a result, they have a competitive advantage from not having the transport of many competitors.

OCI have added 50% extra capacity over the last 3 years. By next year they will have 75% fertilizer production and 25% natural gas. To achieve this the company has spent nearly 100% of its market cap on capex in the last 3 years. Capex and net debt are going to decline dramatically when the process is over. FCF yields will go well into the double-digit category. Net debt will decline from 5.2x to 2x by 2019.

Nassef Sawiris and his family own 42% of the business. They have a history of operating in a way that benefits all shareholders. OCI has returned 40% IRR to their shareholders since they listed in 1999.

EV/EBITDA 7.4x suggests 50% upside.

Risks – fertilizers are a commodity business and volatile. The Natural gas plant has not started producing yet so there could be delays. Leverage is high. There is country risk in Egypt and Algeria (15% to 20% of total sales).

EVRY is a Norwegian IT services company. It’s a leader in financial services in the Nordic area. On the positive side, EVRY has historically had a high market share and good quality products. The problem with EVRY was that it was predominantly government owed and had low margins. That has been fixed.

APAX, the private equity firm, took EVRY private in 2014 when the government sold its 75% shareholding. APAX took EVRY back to market just 18 months later. That was very quick with the IPO falling in June this year. One of the opportunities is that investors do not yet the believe that the business could have been fixed that quickly.

If the restructuring charges are stripped out - they should be gone by 2019 - EVRY looks cheap compared to its best competitor, Tieto. Judged against Tieto, EVRY should have 50% upside. EVRY is the Nordic leader in IT services and larger than Tieto.

APAX has strengthened and improved the quality of EVRY:

- They entered a strategic partnership with IBM that allowed them to reduce the fixed cost base. They have a 10-year agreement with a 3-year extension to take services from IBM. The partnership with IBM is also creating new opportunities to sell their services to big players like Google, Microsoft and Amazon.

- They made a couple of important small acquisitions

- In the first year EBITDA margins were up from 6.4% to 10.6%

This is a high-quality industry with good margins and cash conversion rates. It should attract investors. Griffith expects margins to get better as the impact of the IBM deal works its way through. He expects 12% margins in the full year 2017. By 2018 and 2019 expect margins to hit 14% which is close to best in class.

IT services in Norway are not a high growth industry – 1% or 2% growth per year. EVRY can grow faster than this, maybe 5% to 6%. They are expanding in Finnish banking which is a new sector for them with a contract to service 50 banks.

APAX did not sell much stock at the IPO. They still own 54%. EVRY IPOed at 31 and the shares are currently trading at 33-34. Griffith thinks APAX were hoping for an IPO price in the upper 40s. He expects APAX to reduce their ownership next year.

At Alanda half of the investment team are traditional analysts and the other half are in-house programmers. The programmers write data scripts to track publicly available information on the companies. They scrape public data and measure performance indicators that companies do not report.

Long: United Internet (ETR:UTDI)

United Internet is a Mobile Virtual Network Operator; a broadband reseller for internet access; it is also involved in web hosting, selling webpages and web domains.

It was founded by Ralph Dommermuth when he was 24. United went public in 1998. Dommermuth is still the CEO of the business, owning 40%.

In the last six months, United has been involved in two interesting deals. They bought a 72% stake in Drillisch, another player in the mobile market, and they sold a minority stake in their web hosting business to Warburg Pincus.

The Drillisch acquisition will disrupt the German telco landscape. The German market is divided between 3 mobile operators: Telefonica Deutschland (TD) which operates under the brand 02 is the largest player with 45m subscribers; T Mobile; Vodaphone.

In 2014, O2 merged with EPlus to form the largest mobile operator. The merger was only given the go-ahead on the grounds that TD would sell 30% of its capacity. The auction was won by Drillisch. Now that United own 101 and Drillisch - the two most aggressive players – they no longer compete against each other. Instead they are both competing for TD’s market share. In addition, 101 can offer a bundle of mobile and broadband to the entire customer base of Drillisch.

Alanda’s data scrapers have data showing that the churn rate of 101 and Drillisch is now 29% lower than the market average. Even though 101 is the smallest operator it is the most popular destination with churners. They are gaining twice as many new subscribers as TD. This means that the newly merged 101 is gaining market share rapidly - 39% of the churners are leaving TD to go to 101. Vogel-Claussen noted that in effect he was giving the audience a short idea: Telefonica Deutschland. TD have not been able to compete on price, 101 are 25% cheaper.

In the web hosting business, United has sold a one-third stake to Warburg Pincus and they are working together in partnership. They now have the fire power to roll-up the fragmented web hosting business in Europe through acquisitions. United has recently announced the acquisition of Strato, the German N0.2 in web hosting.

United has announced that in the next 18 months it will spin-off its web hosting unit. Web hosters in the US usually sell for 14x EBITDA.

United trades at 10x forward EBITDA. Its revenue growth rate is double digit. Expect a FCF CAGR of 17% over the next few years. Investor’s interests are fully aligned with the 40% owner’s.

ALD is not well known in the investment world. It was recently listed in June this year. Before that it was a subsidiary of Societe General.

ALD is a leader in the car leasing market. The company manages a fleet of 1.5m vehicles in more than 45 countries. It has grown its fleet by high single digits annually over the last 6 years and its revenue by over 20 % per annum (2013-2017).

The company has 3 main sources of revenues: financing margin on the leasing; services; reselling used cars.

Over the last 5 months the stock lost 25% of its value. The market does not like the used cars business. There is a fear that used car prices could decline and in particular that the residual value of diesel cars could fall.

The Volkswagen Diesel scandal acted as a stress test on ALD and they sailed through that without any trouble. They will come through this latest challenge unscathed as well.

In a worst-case scenario, ALD could lose some money on its used car activities. Perhaps car prices could drop as much as they did in the 2008/9 crisis? In the last ten years the company made a profit on its used car sales in all but one year. If there was decline in profitability as there was in 2009, the company could lose 15% of its profit. The would move the company’s P/E ratio from 9 to 12.

The company’s profits are visible. It knows 80% of its revenue when the year begins. If a multiple of 15 is applied to the leasing business and the services business and a multiple of 5 to the used car business the company could trade on a multiple of 14 which would give 50% upside.

Bodenholm has been live for two years. They spend 50% of their time and resources on short selling. When looking for shorts they start with the accounts and utilise the support of forensic accountants.

Short: ProSiebensat 1. (ETR:PSM)

ProSieben is a German TV company. There are 3 legs to the short thesis.

1. It’s a structurally challenged business that is going to deteriorate. ProSieben has unfavourable channel demographics. A lot of its viewers are in the 40-49-year-old demographic that watch TV the least. They have the wrong content focus. They have been buying US content, but they can’t compete with Amazon and Netflix. They bought Maxdome but it has been a monetary and strategic failure. They took a bit of a write-down in the last quarter but there may be more to come. Advertising revenue has turned down.

2. Their accounting is less than conservative. The company defines its leverage as 1.5x net debt to EBITDA but that does not include pensions and leasing. If you add that in you reach 2.5x. They have not budgeted for future content which would take the leverage to 5x.

3. Several senior managers are leaving - the CEO, CFO have left.

Long: Black Knight

In the Nordics they look for quality compounders. In the global space they like conglomerates that are ‘deconglomerizing’ and spin-offs. Black Knight is a spin-off.

Why is Black Knight a good quality company?

- It’s monopoly type company with 62% market share

- their moat is growing due to regulation

- Customer retention is over 90%

- Switching costs are high

- High margins and free cash flow

- They have pricing power – they raise their prices every year.

- It’s not a cyclical business

- The balance sheet is strong. Currently the leverage is 2.8x but they will de-lever over the next 3 years to 0.7x net debt to EBITDA.

There has been a significant change in the composition of the board – 5 new directors have been elected. FrontFour was a catalyst and were successful in having 3 of their directors elected. The CEO will depart early 2018. Expect there to be a change in the company’s strategy.

Magna is a strong company rated A- for credit risk by S&P and Moody’s. It would not be easy for them to leave as the buildings have been designed for their purposes.

The new board has already bought back $11m of stock since June. The company has been buying below $50 and that puts some sort of floor under the price.

Granite trades at a discount to Canadian REITs but a large discount to US and European REITs.

The new management have an opportunity to lever up the balance sheet. They should use the debt capacity to make acquisitions in the US. There maybe be some buybacks too.

OEMs are outsourcing more component parts because they can’t keep up with development. Metal stamping and chassis production has traditionally been one of the least outsourced areas of car production. Currently 58% of bodies are built in-house but Gestamp thinks the outsourcing market will grow by 50% over the next 10 years. That would be a $20bn growth in the outsourcing market.

Whilst the OEM’s are dealing with the challenges of developing electric vehicles and autonomous driving it make sense for them to outsource the body building. They would rather spend the capex on other things.

Gestamp has developed hot stamp technology which allows them to produce bodies that are lighter and more durable. It is the market leader in this technology and they expect demand for hot stamping to grow at 13% per annum. Gestamp has relationships with the 15 largest OEMs. They are involved in the manufacture of 800 vehicles.

Gestamp has good visibility of future orders and production because they are involved early in the design process. They claim that 90% of their revenues out to 2019 are visible.

Revenue growth 2013-2016 averaged 9%. Global auto production has seen 2.5% to 3% growth. The outsourcing market is growing at about 4%. The hot stamp technology is growing at about 13%. The top-line can easily grow at 10%.

In 2014-16 they invested in 7 new plants and 2016-19 they will invest in 13 new plants. Margins have been depressed by the expansion. The plants will take time to build and reach full production. Margins have probably been reduced by 200 basis points and won’t improve until 2019.

A reasonably easily understood and overlooked company that has been recently IPOed. Market cap: $1bn euro.

Belfesa recycles steel and aluminium. Ninety-two per cent of their revenues come from the selling the of recycled materials, particularly zinc. Revenues tend to get blown around with the price of zinc, so they hedge the zinc price.

The company is difficult to classify by sector and by country. In its previous listing it was listed in Spain (1993) and this time it has been listed in Germany (2017). Triton bought it in 2013 and they sold half of their holding at the IPO, one month ago.

In most of the countries where they operate the market share is close 100%. It’s a consolidated industry. The replacement costs are high – 67m euro per factory. Regulation is getting stronger and is forcing the steel and aluminium manufacturers to recycle. The customer relationships tend to be long term.

They’ve hedged 70% of their zinc sales out until 2020. Ninety percent of volume is pre-sold for the next 3 years.

Investment managers are not prepared for the return of inflation. Deflationary forces have prevailed for many years. Investors are like the frog in a pan of water that is slowly being brought to the boil – they will not move, they won’t jump out.

Most investors have become machines, they have become mechanised. One of the main reasons is the over use of statistical risk management. Statistical risk management is based on spurious assumptions. In markets you need to understand your environment and anticipate it. Statistical risk management prevents you from doing that. Volatility has become a poor risk indicator, yet everyone is using it.

Sir Paul spoke about his journey in philanthropy. Those who have been successful in life have an obligation to give back. As Winston Churchill said, “You make a living from what you get, you make a life from what you give.” There are 4 key elements to philanthropy:

- giving money
- raising money
- giving your time
- using your skills

He wants his philanthropy to be a game changer. You need to research what you are going to do as thoroughly as you would an investment idea. His focus has been on education and the arts.

- Engage the organisation to find out what they need not what you think they need.
- Encourage the organisation to match your funding. This increases their engagement and commitment to the project.
- Measuring philanthropic impact is not easy. Often there are no financial outcomes, but you can quantify some things. Success is often about raising aspirations and opportunities, including inspiring others to give.

Second, in a series of Form 4's filed with the SEC, ValueAct has disclosed a sale of over 3 million shares of CBRE Group (CBG). They sold 2.3 million shares at $42.25 on November 28th, sold another 600,000 at $42.57 on November 27th, and sold 246,000 on November 22nd. After all these sales they still own over 24.91 million shares.

Per Google Finance, CBRE Group is "CBRE Group, Inc. is the largest commercial real estate services and investment firm in the world. It is based in Los Angeles, California and operates more than 450 offices worldwide and has clients in more than 100 countries."

Andreas Halvorsen's hedge fund firm Viking Global has filed a 13G with the SEC regarding shares of Jianpu Technology (JT). Per the filing, Viking now owns 9.6% of the company with over 6.62 million shares.

This is a newly disclosed equity stake and the company recently completed its initial public offering (IPO) in the middle of November. The filing was due to activity as of November 20th.

Per Bloomberg, Jianpu Technology "operates as an open platform for discovery and recommendation of financial products. The Company offers loan applications, credit card services, and sales and marketing solutions."

Tuesday, November 28, 2017

We have secured 15 discounted tickets for our work over the past decade with the Family Office Club which is offering an investor gathering next week featuring 1,000 participants, 75 family office speakers, and 100's of investors in the room. This is the #1 largest family office wealth management and ultra-wealthy investor event globally with more speakers on stage that are family office investors than any other event ever held in the industry.

To reserve one of the 15 MarketFolly subscriber tickets for yourself if you are not already registered at just $399 instead of $995 please register here: http://FamilyOffices.com/folly

This offer is only good until these 15 tickets run out, is not available for those already registered, but can be used to bring a second guest or business partner to the event if you are already attending. They do guarantee this event will be amazing and you will love it though or they will refund your full ticket price with no questions asked. To register please complete the form at the bottom of this page: http://FamilyOffices.com/folly or call Daphny or Jennifer on their team at (305) 503-9077.

Benefits of Attending the Family Office Super Summit:

1. Billions of Dollars in Capital On Stage (and much more in the room): The Family Office Super Summit features actual family offices and more of them on stage than any other event globally, not brokers or junior financial planners, because they know that families in their network and the hundreds of attendees in the room want to learn from the biggest single family offices and top-50 multi-family offices on what has worked for them, how they manage their capital, and what it takes to do business with a leading family office.

2. Tap Into & Meet With the Fastest-Growing Investor Group: Family offices are becoming an increasingly important investor group for hedge funds, private equity managers, real estate companies, private companies, and anyone who relies on outside capital. These families control hundreds of billions of dollars and we invite family offices from all asset classes to attend this annual summit in South Florida.

3. Get Real Business Done: Unlike other conferences and trade shows, the Family Office Super Summit is all about getting real business done and building real relationships. There are multiple networking sessions throughout the 3 days, starting with a welcome cocktail hour the night of December 4th and continuing through the conference. A Florida single family office CIO cheerfully told them at the end of their last event, “I came here with 100 business cards; I have 4 left.”

4. Skip the Bull: This conference isn’t a pitch fest by sponsors; it is a conference for investment and wealth management professionals. You’ll hear directly from real family offices looking to allocate capital and, like all of our events, the investors on stage will give it to you straight on what drives their portfolio strategy, how they select investments, and where they are looking to invest their money going forward.

5. More Value for Less Money: If you are wondering how to budget your marketing and conference dollars, consider this – the Family Office Super Summit is their largest conference of the year, featuring 60+ family offices on stage and many more in the audience over 2 days. For the chance to engage such an exclusive audience for a single day, you can usually expect to pay north of $2,000 for just one day.

Citadel's founder Ken Griffin made a rare appearance on CNBC. Citadel started with $4.7 million in 1990 and now manages over $27 billion. In the interview, he talked about his market views. He noted, "Valuations are stretched. We're not in the sort of classic mania that you get at the very end of a bull market."

Using a baseball analogy, Griffin said we're in the 7th inning (out of the usual 9) of this market rally. That said, he still seemed to believe that there was a "very constructive" environment for stocks given interest rates are still low, there's low inflation, and companies are seeing ok sales growth.

And while the government has been working on a tax cut plan, Griffin noted this sort of reform would be typically reserved for a recession. So he asks if we really need to cut taxes as much as they're proposing. That said, he still thinks that lowering and simplifying taxes is a win for keeping America competitive.

Griffin said, "To the extent that this represents fiscal stimulus, this is a late in the business cycle move. It would be contrary to what you would traditionally do from an economics perspective."

He also touched on one area that he thinks has become very speculative: "Bitcoin has many of the elements of the tulip mania in Holland." He thinks many people buying don't understand what they're buying and instead are just reading articles about it going up and up, so he wonders about how this bubble might end. He did think that the blockchain technology could definitely have practical uses going forward though.

The CNBC host said Citadel was up 11.4% for the year through October in its Wellington fund. Griffin attributed this to "good old fashioned stockpicking." He says their entire strategy is finding which companies are outperforming expectations and which are underperforming.

Monday, November 27, 2017

A reader was kind enough to pass along an old interview from around 1985 with Adam Smith featuring Warren Buffett, John Templeton, and Robert Wilson where each investor talked about their investment process and style.

Warren Buffett Interview

Buffett starts the interview with his trademark quote: "The first rule in investment is don't lose. And the second rule in investment is don't forget the first rule, and that's all the rules there are."

Buffett said the most important quality of an investor is the temperamental nature rather than the intellectual capacity.

He also pointed out the short-term nature of others: "Most of the investors focus on what the stock is going to do in the next year ... They do not really think of themselves as owning a piece of the business."

Buffett said he prefers to value the business first without even knowing the price. That way he can make a determination and then decide how it compares to the current valuation.

He said to define your area of competence, then within that area of competence find whatever sells at the cheapest price relative to value.

It's funny to hear Buffett say that he doesn't own IBM (IBM) in the interview as he noted he doesn't dabble in tech stocks. Fast forward 30+ years and his views have evolved a bit. He now owns both IBM and Apple (AAPL) today, though he's been selling the former as we noted in our recent newsletter.

"Boredom is the problem with most professional money managers." He's perfectly content to sit and wait for the fat pitch.

Templeton made his mark by going against the herd, and thought his distance from Wall Street was an advantage (he was in the Bahamas). Buffett, of course, has also been positioned away from New York in Omaha, Nebraska.

Templeton developed a motto: "To buy when others are despondently selling and to sell when others are avidly buying, requires the greatest fortitude and pays the greatest reward."

He said his average holding period was 6 years so patience was the name of his game. His strategy was to look for bargains worldwide and to buy the cheapest stocks and then to extrapolate earnings further into the future than most investors.

Robert Wilson Interview

He was focused on stocks with rapidly growing earnings and bets against those whose earnings are going down.

He said, "I am not an original thinker. I tend to rely on other people to feed me ideas. And more bright people are in New York than anywhere else. I'm a derivative thinker."

His philosophy is to be in stocks that have potential for huge gains and risk/volatility is perfectly fine by him. "The only way one makes money in the market is when the market's perception of a stock changes."

He was looking for stocks where earnings haven't started to improve yet, or if they're improved they're going to accelerate.

Wilson also focused on the notion of hubris in markets and how he too fell victim to it.

Embedded below is the video of the interview with these well known investors:

Wednesday, November 22, 2017

The final countdown to the Family Office Super Summit in Miami has begun. In just 2 weeks you will be able to join a room of hundreds of family office executives, private wealth managers, dealmakers, and investors for a distinctive conference experience with various networking opportunities. If you needed any more reasons to attend the Family Office Super Summit, here are 30 more:

We have just under 100 tickets remaining for this 1,000 attendee event, I would suggest registering soon before we sell out if you do plan to attend by completing the reservation form at the bottom of this page: http://FamilyOffices.com/Super

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